Are The Dow's Top-Yielding Dividend Stocks At Risk?

Includes: DIA, INTC, T, VZ
by: Black Coral Research

It comes as no surprise that stocks that pay dividends are the most sought after stocks by investors. Companies try to maintain dividend payments, but in the process, investors sometimes tend to ignore vital parameters like free cash flow and dividend payout ratios. These parameters define the strength of a company, and the ability to continue paying dividends in the long-term.

Discussed below are Dow's (NYSEARCA:DIA) three highest-paying dividend stocks and whether or not they can maintain high dividend payments.

*as of 5/6/2013

Source: Yahoo! Finance

AT&T Inc. (NYSE:T) is a multinational telecommunication service provider based in the United States. The annual dividend yield of AT&T is presently 4.7%, but there are some concerns over the company's ability to continue this streak. AT&T's yield has declined but it continues to remain the highest-yielding component of the DOW. In 2012, AT&T distributed $23 billion back to investors, $10 billion of which was dividends and $13 billion was stock buybacks. This $23 billion was $4 billion more than the free cash flow of the company, however, which is alarming. The current dividend payout ratio of the company is 231%, which is no doubt very high, but is fairly common in the telecom industry.

AT&T reported its 1Q2013 income at $3.7 billion, a slim increase over $3.6 in the corresponding quarter of fiscal year 2012. The company's revenue came in at $31.4 billion, a 1.4% decline from 1Q2012. The company paid shareholders $2.5 billion in dividends and $5.9 billion in stock buybacks. The cash flow of the company for 1Q2013 came in at $8.2 billion and free cash flow was recorded at $3.9 billion.

The company is seeing some decline in its wireless business in addition to its revenue growth. If this trend continues, it will affect the full-year outlook for the company. AT&T is primarily depending on Digital Life, which is a new wireless home security and automation business.

The company's capital expenditure budget is increasing and, on average, has been around $20 billion annually since 2007. The management has stated that this CAPEX will surge to $22 billion in 2013, though increased CAPEX with uneven growth may adversely affect dividends in the long term.

Intel Corporation (NASDAQ:INTC) is a multinational semiconductor chip maker based in the United States, with one of the highest payout ratios among tech companies. But the concern is that the capital expenditure of the company is increasing. The cash flow in this situation cannot be seen as the only medium to payout dividends and buyback shares. Intel also should not opt for borrowing as the top line growth of the company is declining. The free cash flow of the company has been affected due to its increased CAPEX. The chip maker is seeking to spend $13 billion on CAPEX in 2013, an increase over 2012 by 18%; this will definitely affect the earnings in 2013.

Intel's growth rate has been quite rapid as the annualized growth rate of dividends has been 30%; however, this rate has recently come down. With increased CAPEX and a dividend payout ratio of around 57%, it does not seem that the company will be likely to increase dividends in the near term.

In the first quarter of 2013, the revenue for the company came in at $12.6 billion, and the net income posted by the company was $2.0 billion. The company has generated cash from operations at $4.3 billion. It paid $1.1 billion in dividends and $533 million was used for share buyback.

The chip maker launched "ultrabook" in 2012 but failed to gain as much footing as it expected. The company initially estimated 22 million units to be sold in 2012, but in actuality, only 10 million were shipped. The company is working hard to increase its margin, but this disappointment has taken its toll on free cash flows.

Though the company has a long history of paying dividends, these recent events have raised some concern over Intel's future course,

Verizon Communications Inc. (NYSE:VZ) is a telecommunication and broadband company, operating the largest 4G LTE network in the United States.

Verizon's dividend payout ratio at present is 171%, the highest it has been in 10 years. The telecom major has been able to maintain its cash flow in order to uphold its dividend payout ratio. The yield is 3.9%, which is less than AT&T's 4.8%, but the firm has taken some major steps in increasing its network coverage, and its stock performance is also solid.

The company earned a revenue of $19.5 billion in 1Q2013, an increase of 6.8% from the previous year. A positive indication is that the capital expenditure for the first quarter of 2013 was almost flat compared with last year; thus, its free cash flow increased and if it keeps check on the CAPEX, then it can certainly enjoy positive cash flows in the future as well.

In 1Q2013, there was a 63% increase in free cash flow, up to $3.9 billion compared with the previous year's $2.4 billion. This is good from the dividend point of view; however, there is concern that the company is reeling under huge debt. The dividend is standing at its multi-year low with $53 billion in debt.


All three companies seem to be in a safe position… for now. The real question is for how much longer. For each security discussed there are valid risks, which no investor should ignore.

For Verizon, the company's excessive debt may hinder its dividend-paying capability in the future.

Intel needs to keep its growing CAPEX in check, but this is not guaranteed to happen as the company transitions to smaller devices.

AT&T, while investor friendly, needs to find a balance between cash flow and the amount returned to investors in the form of dividends and stock buybacks. The same goes for VZ, since they both have payout ratios in excess of 170%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inspire investors. This article was written Aman Jain, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.